Question

John Schumer operates three entities that he owns 1000% in the Providence, RI area. There are two limited liability companies (LLCs) and one S corporation. Each of the LLCs holds rental real estate. LLC 1 holds a six-story, multi-unit building. The minimum tenant stay there is 31 days. And there are mandatory housekeeping serviced provided on a bi-weekly basis. LLC 2 holds a single-family home rented on an annual basis. Both LLC's pay the S corporation a managment fee. John is the sole employee of the S corporation, from which he take a full-time salary for managing the two LLCs, where he materially participates. He is an architect. However, all his time spoent running th three businesses. He no longer performs architectural services.

1) Is the rental activities income subject to the self-employment tax?

2) Finally, how can we streamline the recordkeeping for the three entities?

Answer 1

Answer 1

• Unlike wages from a job or a business you participate in, rental income isn't considered to be earned income.
• It's not classified as investment income like capital gains, interest and dividends are. Instead, it's considered to be passive income by the IRS, and therefore is not subject to self-employment tax.

Answer 2

• For LLC Setting up an LLC is the most common, each in their own LLC all held by a holding LLC then you have double layer protection, That is more of a legal issue than it is a financing or business issue, a lawyer can help you with the best structuring strategy. The thing to remember though is that as your investment portfolio grows in naturally becomes a business unto itself so setting it up this way from the start will save you issues later on.
• I always suggest that clients have a single operating LLC, and then disregarded entities for each property, of which the operating LLC is the sole member.
• Keeps things separate for bookkeeping and records purposes, as well as providing the extra layer of protection.
• For the couple hundred dollars extra you will spend maintaining LLCs, if something happened at one of the properties, you are protected (for the most part) from any judgment creditor touching your other investments.
• Salary employee should maintain the record of payroll, tax liability, salary structure, and time keeping etc.